Strategic management basically aims at formulating and implementing effective strategies. Effective strategies of course, are those that help a superior fit between the organization and its environment and the achievement of strategy goals. Strategies necessarily change over time to suit environmental changes but to remain competitive organizations develop strategies that focus on core competence develops synergy and costs value for customers.
Core Competence: An organization’s core competence is something it does exceptionally well in comparison to its competitors. It reflects a distinct competitive advantages (like superior research and development, mastery of a technology distribution channel manufacturing efficiency of customer service) that provides the firm (1) access to variety of products /markets (2) contributes greatly to custom benefits in the end products and (3) is an exclusive and inimitable preserve of the firm that is long lasting and cannot be easily copied by competitors.
When organizational parts interact parts interact to produce a joint effort that is greater than the sum of the parts acting alone, synergy occurs. Some call this the 1+1 = 3 effect. In strategic management managers are urged to achieve as much market, cost, technology and management synergy as possible when arriving at strategic decisions (such as mergers acquisitions new products new technology etc). When one product or service strengthens the sales of one or more other products or services, Market synergy occurs. Wal-Mart’s new Super centers and Super K marts that put discount store and a grocery store under a huge roof (Crosswords, Mumbai Spencer’s in Chennai) are a good example of market synergy in action. Cost synergy can occur in almost every dimension of organized effort. When two or more products can be designed by the same engineers, produced in the same facilities distributed through the same channels, or sold by the same sales persons, overall costs will be lower than if each product received separate treatment. In Europe today, banks and insurance companies are linking up in a effort to market a wide array of financial products that each would have trouble selling on its own (Walls street Journal) Technology synergy involves transferring technology from one application to another thus opening up new markets . In management synergy also a similar kind of technology transfer is needed. Management synergy would be achieved, for example, if a software product company with weak roots in training and education line hires a new CEO with strong academic and training credentials. Ideally the new CEO would transfer his technical skills to good effect.
Value Creation: Exploiting core competencies and achieving synergy help organizations create value for their customers. Value is the sum total of benefits received and costs paid by the customer in a given situation. Ideally the purposes of a strategy should be to create a lasting value that is greater than the cost of resources that are used to create the same.
Dynamic in nature, the strategic management process is the full set of commitments, decisions and actions needed for a firm to achieve strategic competitiveness and earn above average returns. Strategic competitiveness is achieved when a firm successfully formulates and implements a value creating strategy. When a firm implements such a strategy that order firms are unable to duplicate or find too costly to imitate this firm has a sustainable competitive advantage. By achieving strategic competitiveness and successfully exploiting its competitive advantage the firm is able to achieve above average returns which are returns in excess of what an investor expects to earn from other investments with a similar amount of risk. Risk here refers to an investor’s uncertainty about the economic gains or losses that will result from a particular investment.